Is this the start of a big selloff?

Tom Lloyd worked in marketing for the specialist firm Adler Coleman, the
fundamental research firm Woolcott Research, the institutional broker Hoenig &
Co. and the registered investment adviser Koenig Advisers. Currently he markets
services such as StockpickerUSA.com to institutional
investors. He can be reached at
tomklloyd@verizon.net. Tom has an MBA in accounting. His articles have been
published in Technical Analysis of Stocks and Commodities Magazine and
SeekingAlpha.com. you can follow Tom on Twitter at
@tomlloyd12.

First, the market misses the first five days signal, and now we have a down Friday and Monday. The Stock Trader's Almanac is frowning about both. The Almanac notes that for 30 years, the down Friday/Monday has had bearish implications. Is there reason to worry or is this just a plain old cyclical pullback caused by anything that spooks an overbought market? Does the reason really matter?

Not really. It is just an excuse for the market to do what it was going to do anyway, when it goes up too far too fast.

Don't worry because, according to the Almanac, the 23 times we had down signals for the first five days of the year, the full year was up 12 times and down 11. That means it's a flip of the coin on the down signal, whereas the up signal for the first five days worked 85% of the time. The Almanac has us hoping for a positive January because the full month signal is right 88.9%!

For those who don't believe in statistics, there are always the market charts giving off lots of signals. In the last chapter of my book, I identified the signal that would tip us off to the next bear market pullback. The book was published in August of last year and that positive signal was still in place. Now, more than a year after I wrote that chapter, the signal is still in place. Here it is today, the stochastic signal on the monthly SPY chart. You can see that it still has not identified the end of the parabolic, fifth wave up. The end of the fifth wave up, signaled by the breakdown of the stochastic signal will be something to worry about, not this piddling pullback on the daily chart.

You can hardly see it on the weekly chart and it is imperceptible on the monthly chart. All of which tells us there needs to be much more selling to bring on a major sell signal. It would take a major catastrophe to turn all the positive signals on the weekly and monthly chart negative. Continued and very heavy selling in January would also do the trick.

That brings us to the daily chart, the favorite of traders and speculators. The sharks smelled blood in the water Monday, and they attacked. The volume increased but a quick glance at the volume on the daily chart shows it is nowhere near the size of the volume spike on the last buy signal. Could that happen this week? It could, but it would take some unusual news that is below the horizon. Technicians wait for signals to happen, and they avoid speculating about what signals will show up. There are no major sell signals in place yet, nor is any signal approaching a major sell signal. So far we have nothing more than a minor, daily chart selling cycle that will be finished probably by the end of the week.

It is testing well-known price-support levels. Price hasn't tested the 50-day moving since Dec. 18 when it jumped like a cat on a hot tin roof. Could it go down to test the 50-day? Yes, it is overdue, but there is no indication right now that it will break below the 50-day. Both the 50-day and the 200-day are in strong uptrends.

The 200-day was last tested in Nov. 2012. Before these trends are ever threatened, we will have to see a topping formation, such as the double top or the head-and-shoulders on the weekly chart. Only a sudden, exogenous jolt could take this market down without a topping formation. Such a disaster is unpredictable, and no chart will see it coming

Sit back, relax and wait for all the 2013 left-over profit-taking to finish. Wait for the sell signals on the chart and don't fret about the market until these sell signals appear. Without a major sell signal, most portfolio managers will be using the pullback to buy on weakness. They would love to see a healthy test of the 50-day moving average and be able to buy all their favorite stocks at a 5% discount. They will be buying on weakness, as they always do in a major bull market. If January is a positive month, they will roar ahead through May.

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